HMRC has announced that organisations with complex or legacy IT systems can apply for an extension to the one-year soft landing period to maintain digital links as part of the new making tax digital (MTD) rules. However, most VAT registered organisations with a taxable turnover exceeding £85,000 and a non-complex IT system must still introduce digital links in the first VAT return starting on or after 1 April or October 2020.
As a reminder, at a high level, there are three main MTD requirements:
- Digital record keeping – preserving certain records and accounts within ‘functional compatible software’ which means a software program (or programs), although this can be Excel.
- Digital links – creating a digital link for data transfer between software programs, ensuring a fully linked digital audit trail between the original recording of the digital record and the VAT return submission. A digital link includes a data export from an accounting system into Excel, and formula in Excel to pull-through figures. However, ‘copy and paste’ and hard-coding figures are not valid digital links.
- API submission – the VAT return submission must be made via an API – in practice this means an API-enabled software tool.
So why is HMRC announcing this extension? Most organisations have now identified their preferred method of VAT return submission, either via their existing IT systems or by selecting one of several specialist software packages that are now available. However, the complexity of the VAT legislation means that when calculating the final VAT return numbers, many organisations must interrogate several sources of information which are independent of the API technology to compile their VAT return figures.
The MTD rules demand that the transfer of the final VAT return numbers to the API submission software cannot be manually entered or entered using a copy and paste function. While this requirement is logical as manual interventions are prone to human error, it has created a challenge for organisations with different systems that are not integrated or supported by software providers (and therefore can’t be adapted to the new rules). This final digital link requirement is not subject to the 12-month soft landing period.
A number of organisations, due to the industry in which they function, operate niche finance and accounting software. Often it is not possible to maintain the digital links by exporting the data from the original source system holding the digital record keeping entry into another software tool (eg Excel) or bridging solution for the final API submission.
In recognition of this challenge, HMRC has for some time allowed a 12-month digital link extension to the MTD deadline to introduce these changes (ie 1 April 2020 for most organisations and 1 October 2020 for complex taxpayers).
Despite this soft-landing period, it is evident that the challenges associated with the proper implementation of digital links is too difficult for some. In response to this, HMRC has stated that if you operate ‘complex or legacy IT systems’ which cannot be adapted in time you must apply for an extension to put digital links in place. However, HMRC’s guidance suggests that they will challenge applications and state that ‘cost alone is not sufficient reason to issue a specific direction’.
The formal application requires details of existing systems to be mapped out, a clear timetable to becoming compliant and controls to be put in place to minimise the risk of errors when manually transferring the data. If you are considering making an application it is advisable to seek professional advice.
Although MTD is likely to take time to implement and may well involve additional cost, many organisations are using the opportunity to review the VAT return process to identify efficiencies and to ensure it is completed in the most efficient way instead of following historic and legacy processes.